Update: I was unfortunately not aware of Shamus Young's severe criticism of Fallout 3 available here to link in the original piece and I regret that. It dovetails rather nicely with what I've written and it's much better executed than my piece. I strongly recommend anyone...

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Why Does the Video Game Industry Hate Used Game Sales?Posted on Saturday, September 17 2011 @ 16:38:49 Eastern

Seriously. What is the Big Fucking Deal?

Video game publishers (and by extension, video game developers) sell millions of copies of their games, and they have the audacity to complain about a few units lost to second-hand sales? Some people have said that, compared to the enormous number of pre-orders and day one sales for triple-A titles, retailers barely sell any used game products. Others have argued that used games that do get purchased are sold at a lower price than the new copies, which means that the retailers make less money on a used game sale than they do on a sale of the same game brand new. This, I am told, encourages retailers to sell new games over used—the second-hand games market is just a service to consumers. The video game industry, some say, keeps complaining because they are avaricious and stupid, churning out banal junk no one wants and then blaming used games for their poor sales numbers.

But why argue solely based on assumptions and hearsay? I, for one, think it’s high time that we, the loyal consumers of video game entertainment, pull back the curtain on the used games market. Let’s reveal these publishers, developers, and hardware producers for what they are: a greedy, hegemonic entertainment-industrial complex trying to squeeze every last dollar out of the retailers and consumers that they purport to serve.

To analyze the used games market, we’ll look at real financial data from Gamestop, one of the most oft-cited retailers on the topic of second-hand game sales. All of the following data represents Gamestop’s 2010 full-year results and is publically available in Gamestop’s annual 10-K report.

Let’s start by looking at just how big the used games piece of retail pie actually is:

So of Gamestop’s $8.1 billion of video game-related sales in 2010, $2.4 billion came from used games and used game hardware. That’s 30.3% of video game-related sales coming from used game products… not exactly what I would call an insignificant portion of the market. Still! Gamestop is first and foremost a new games retailer. It’s not as though they’re making the majority of their money from second-hand sales.

Right?

The thing of it is: When we want to find out how much money is made by selling something, we can’t just look at the sales dollars—we also need to consider how much the sold item cost to create or, in the case of retailers, to purchase in the first place.

If I buy a boat for $499,000 and then turn around and sell it for $500,000, I haven’t actually cleared a cool half million. In fact, I’ve only made $500,000 - $499,000 = $1,000. This number is my gross profit—it’s the amount of money that I have earned on the sale, which I can then use to pay for common business expenses like labor, rent, utilities, travel, hookers, and blow, ultimately pocketing the final difference as earnings. For a game retailer, gross profit shows how much money was made off a video game sale after paying back the company or person the game was bought from in the first place. This is how Gamestop’s gross profit breaks down:

Holy ****.

What the hell happened to “selling at lower prices means lower profits?” According to these numbers, in 2010 Gamestop made more money selling used game products than it did selling new gaming hardware and software combined. 54.7% of Gamestop’s video game-related gross profits came from used game sales--Gamestop isn’t a game store that also carries used games, it is a pawn shop that also sells new products!

What’s going on here? How are these used games generating so much money?

To find out, we start by looking at the margin rate for used and new game sales. Margin rate measures the percentage of each sale Gamestop earns as profit. It answers the question, “If I could have one additional dollar of sales, what type of product would I want to have sold?”

To calculate margin rate, we take gross profit and divide by total sales. In the case of Gamestop, this gives us:

For cheap-ass second-handers, those are some valuable used games: Sales dollar for sales dollar, used game sales earn over DOUBLE the profit of new game sales. Put another way, if Gamestop had the choice of selling a $60 new game or a $60 used game, the used game wins hands down. In fact, Gamestop would rather sell a $50 used game than a $60 new game. And a $40 used game. And a $30 used game. If Gamestop had its way, it would not sell a single new $60 game until the price of the used game fell to just under $27.

But Gamestop doesn’t have to reduce used game prices to $27 in order to generate sales. Generating over one billion dollars in gross profit is as simple as a five dollar discount.

We know now that selling a used game is more profitable to Gamestop than selling a new game. We know that this profitability is coming from not just the ability to acquire used games more cheaply than new games, but to then sell those used games at a nearly identical price to the new. What we don’t yet know is, how? How is Gamestop able to sell $2.4 billion worth of used games while only offering such a slim discount?

To answer that question, we need to tap into broader economic theory. Pay attention; this is where things get interesting.

There is an important distinction between used video games and other second-hand markets: With video games, a used product acts as a near-perfect substitute for a new one. Unlike cars and furniture, which degrade with use, a “used” game disc is functionally identical to a disc fresh out of the factory. Spinning around inside a console, both process the same data, project the same images onscreen, and react the same way to inputs. This substitution effect confounds developers and publishers, who work for years through countless software iterations and millions of invested dollars to bring to market the best product they have the faculties to produce. Within twenty-four hours, a competing product appears, only this game required no up-front investment, received free advertising and marketing, and is identical to the first in all aspects except one: It is less expensive.

Let’s take all of the above as a given: The thriving used games market, the products, and the price points all exist the day that you, Joe Consumer, step into a Gamestop outlet. You’ve traded in all of your old games, and now you’re browsing the PS3 rack. Arkham City catches your attention—new for $59.99, or used for $54.99.

You glance back to the register; a grizzled father is demanding to know why Gamestop released a new DS two weeks after he bought his daughter the old one she no longer wants because it has “fewer ‘D’s”. You’ve got some time.

First question: Does $5 make the difference between purchasing Arkham City and leaving the store empty-handed? This is the “market expansion” argument—that the lower price of used games allows gamers to buy software they otherwise would not have. In the majority of cases, the answer will be no. There are new games available from sixty to ten dollars, suggesting that an inability for new games to meet frugal consumer price points is not the issue. In fact, Gamestop intentionally prices their used stock as close to the new as possible, so long as the remaining difference still registers psychologically with consumers as being a ‘discount’.

But damn it, WHY? Why doesn’t anyone see what’s happening here? If we all buy used, the gaming industry suffers. Can’t we all just band together and give that $2.4 billion back to be reinvested in making the games we enjoy?

Nope.

If one gamer were given the choice to fund the future of game development with that $2.4 billion in exchange for buying every game he played new, that single person might say, “Hey! Said $2.4 billion is going to fund a ton of great games that wouldn’t exist otherwise, and having the option to purchase all those future entertainment experiences is going to give ME much more happiness than a measly five bucks per game. I’ll definitely buy new, because in the long run, it will be the bigger benefit to ME.” But his decision to buy new doesn’t give $2.4 billion back to his favorite developers and publishers. It gives $40—enough money to buy a developer a foot-long sub instead of the usual six-incher for a couple weeks, but not enough to influence anything in the long run. The other $2.4 billion worth of customers are in the exact same position, and they are all thinking the exact same thing:

“It doesn’t make a difference.”

Consumers make decisions at the margin. Whether the other $2.4 billion is going to the publishers or to Gamestop, my $40 contribution will not make ANY difference on the state of the industry. And it IS an industry—we owe it nothing. If my $40 donation won’t bring ME happiness, then as a rational consumer, I have no reason to buy new. If there is no discernable difference in quality between the new and used product, I have no reason to buy new. But, if I were to perceive one otherwise identical product as having a discount in price over the other otherwise identical product, no matter how meager the true dollar difference may be…?

So we buy the used game. And then publishers and platform owners, in a desperate attempt to re-capture sales lost to their doppelganger competition, push pre-order bonuses and downloadable content and subscription services and microtransactions and map packs and digital distribution and online passes and games that can only be played once and any other method of product differentiation that a retailer can’t turn around and resell in the same ****ing box the publisher created to house their own product. And then consumers complain that the video game industry is greedy and stupid and bereft of creativity and building things that customers do not want. And the video game industry takes this criticism with as much stoic optimism as their PR teams can muster because shouting back, “It’s your own ****ing fault!” will not in any way bolster what new game retail sales are still being captured.

Haiku Friday was birthed from the moist mind-womb of Duke Ferris on April 17, 2009.

Having acquired beta invites for new MMO Free Realms, Louis C.K.’s emaciated twin brother elected to distribute them amongst the hoi polloi by ranking their worth as people.

He chose with the same metric God uses to decide who goes to heaven: the American haiku.

Four centuries after the Portuguese introduced firearms to the daimyo in 1543, the Japanese passed an even more destructive force on to Western culture. The American haiku, or “Baka na Amerikajin” in Japanese, consists of seventeen syllables spread across three lines in a five-seven-five distribution. The use of a season word is also considered standard practice, though masters will substitute an 'iron haiku ingredient' in its place.

But alas, though the haiku itself is the perfect measure of pureness in character, Game Revolution eschews judging on merit and instead unfairly favors senior members, specifically those from 2005-2007, when assigning prize recipients. Discounting the contests in which every entrant won by default or the victor was not publicly announced, one hundred sixty prizes have been awarded to eighty-four unique winners over one hundred contests. Consider those winners. First is LawnGnome, with wins in eleven individual Haiku Fridays, a confessed felon with a record as long as Arizona is filled with scorpions. His join date: April 25, 2007. Ranking second with seven wins is De-Ting, a forumer who famously convinced Blake Morse that surgically exposing and then swallowing his own intestinal tract would perpetually power his body. He joined Game Revolution on November 11, 2006. In third place with six wins is the abstruse Rinnon. Some sources claim he was the original one hundred fifty first Pokemon, while others describe him as “the idea of superluminal velocity made manifest.” Join date: November eighth, two thousand FIVE. Between them—13% of all discrete Haiku Friday prizes.

But why stop there? Let’s use a discrete probability density function--I mean, a bar graph--to view the percentage of total discrete prize winners from each year (the blue lines) as compared with the percentage of total unique entrances in each contest from each year (the red lines). The higher the blue line is from the red one in the years 2005, 2006 and 2007, the heavier those elitist *******s heading Game Revolution are biased against newer members.

Oh, that is just ****ing swell. Oh seven has more winners, oh six has more participants, and oh five is dead even! Between the years: a one-percent difference. But you sycophants are dumber than a lobotomized rock if you think I’m done yet. If I can show that the number of participants in each year is statistically different than the number of winners, then we know that, one way or another, Game Revolution has join date bias. We’re busting out the big guns—it’s statistics time.

We can examine the data with something called a ‘two-sample Chi Square test’. Put simply: a chi square test looks at the squared difference between the number of winners and participants in each year--weighted by sample size--and then adds all of those differences up. This number is the chi-square value. The higher the number, the higher the differences, and the more confident we can be that the distributions of winners and participants are NOT equal with respect to their join dates. In fact, statisticians can compare the chi-square value to a special chi-square distribution and state to the percentage point their confidence that two sets of data did NOT come from the same distribution. In non-******* speak, that translates to how certain we are that Game Revolution has been ****ing one group or the other of members over. In statistics, 95% is the generally accepted confidence level at which a statement can be credibly upheld. A 95% confidence interval for our specific data translates into a chi-square score of roughly 18.3. If the chi-square value we calculate for our data sets is 18.3 OR GREATER, then we will have statistically proven that the haiku crew at Game Revolution is lower than the boot scum on a shark-swallowed seafarer. Let’s do some math:

ARE YOU FUCKING KIDDING ME!? A FUCKING SEVEN-POINT-TWO!? Phoenix-****ing-Wright couldn't prove **** with a seven-point-two! Do you know how confident of Game Revolution's foul play we can be with a seven-point-two? 30% confident--not even a fifty-fifty shot. After all that work, there is literally LESS than no credible statistical evidence that Game Revolution has been doing anything but judging Haiku Fridays without considering join dates in any way.

This is not to say that Game Revolution judges Haiku Fridays solely on haiku quality.

However, the weights and metrics that are used apply equally to every participant. At the end of the day, persistence and talent make consistent winners, not some arbitrary game state.

Don't believe it? Take a glance at this comparison of all time haiku winners and participants.

And from this, one truth:

You don’t win if you don’t play.

This was hard to write.

EDIT: A miscount! Chicanery! Outright bamboozlement! Taking a break from the exhaustingly rigid format imposed on the rest of the article, there was a mix-up in the Haiku Friday winners tabulation that assigned one of Lien's wins to De-Ting. This means that Lien is actually in second place with seven wins, and De-Ting is part of the triple-six trio.

Given that Lien's join date is 2008, catching this error before the launch of the article would have required major rewrites. How fortunate that I caught it just after... and had this revised winner's chart prepared in advance!

Gamerevolution.com has been a fixture in my life for over 10 years. I was around when the only way to enter the site was through a compacted car and the home page could fit on an 800x600 postage stamp. I even remember when the mailbag was a weekly feature! And when it was a biweekly feature. And a bimonthly feature. And a quarterly feature. And when it became less a ‘feature’ and more a ‘fat chick you try to usher through your dorm hallway as quickly and quietly as her drunken stumbles allow, but oh god she just can’t plant those lush feet without summoning the God of Thunder, so you stuff her in a broom closet for three years running and pray no one ever needs a dust pan’.

I may be bitter.

Point is, I’ve been around, and you can take it from me when I say that the critical nature of reviews at Game Revolution has evaporated like morning rain under midday sun. Sometime around Game Revolution’s purchase by Bolt Media, an executive came down from on high and stuffed ethics into the broom closet next to a then frightened and confused mailbag. Now, both lie decomposing while new games are wetly gummed by a novice pack of reviewers too well-sated from publisher kickbacks to wield the fangs of objective criticism that once protected we consumers so long ago. Game Revolution gives out more ‘A’s than Oakland Coliseum on free hat day, whereas the only places capital ‘F’s can be found are in the titles of reviews like Far Cry 2 and Fallout: New Vegas. Both of which, incidentally, received an ‘A-‘.

But maybe, dear reader, you don’t want to “take it from me” that your beloved independent game review site has been slit wide open and re-sewn into a corporate hand puppet. Maybe you want cold, hard proof that since the buyout of Game Revolution in late 2004, the average review grade for games has experienced a dramatic and otherwise inexplicable inflation.

Proof you want, proof you’ll get.

To gather the data for this exposé, I turned to Game Revolution’s own database of reviews. Since its first postings on June 5, 1996 (an inaugural class consisting of PC games Alien Odyssey, Duke Nukem 3D, Mechwarrior 2, Tomb Raider, War Wind, and Warcraft II) to May 1, 2011, Gamerevolution.com has reviewed 4,193 individual games—almost 5.4 games per week. This number excludes 40 Mac game reviews, 13 reviews with no legible grade, and a few double posts on the PC and PlayStation lists.

“But wait,” say the Game Revolution sycophants, “what about multi-platform releases? If you count 3 ‘A’s for games like Fallout 3 and AC2: Brotherhood, they will unfairly weight the average review score. You *******.”

While I might be an *******, I’m hardly unfair. For each multi-platform game with multiple reviews, I removed duplicate grades. So, for Madden NFL 06, the three ‘B+’s for the Gamecube, Xbox, and PS2 reviews are reduced to a single count, but the ‘B-‘ for the PSP review and the ‘C+’ for the Xbox360 review are both included. Condensing all the multi-platform reviews, we arrive at a total of 3,516 individual grades spanning nearly 15 years.

Gamerevolution.com was purchased by Bolt Media, Inc. on November 17, 2004, and then purchased from a bankrupt Bolt Media by CraveOnline on February 25, 2008. I will consider the ‘self-ownership’ base period to be any time before the Bolt Media purchase. With the final data table tabulated, all that’s left to do is convert the grades into numerical scores, compare the averages across each time period, and find out if the periods under either owner yielded (statistically) significantly higher scores than the self-ownership base period.

“But WAIT, you *******!” chirp the sycophants. “You can’t just convert grades to numbers arbitrarily! If Game Revolution gave out relatively more ‘B+’s during the self-ownership period but relatively more ‘A-‘s during the Bolt Media period, it will make a HUGE difference if you score a ‘B+’ as an 89 and an ‘A-‘ as a 90 versus scoring a ‘B+’ as an 87 and an ‘A-‘ as a 92. And what if you converted on a strict 0-100 scale like Metacritic used to? You’d botch it so hard that people would mistake you for Umberto Granaglia!”

Since I would sooner die than give the shills at Game Revolution even a modicum of wiggle room through which to slither, I’ll placate the sycophants on this one. Instead of converting to an arbitrary point score, we’ll take the percentage of each grade’s frequency in a period relative to the total. So the 173 ‘C+’s given during Game Revolution’s self-ownership period out of the 1,981 non-duplicate grades for that period yields 8.73% ‘C+’s during self-ownership, and so on. Then, we will arrange the grades by relative value (A > A- > B+ > B > … > F-) and create a cumulative distribution function.

“A cumulus distributed what?” the sycophants query. For our purposes, a cumulative distribution function shows, for each possible review grade, the percentage of reviews that have a score greater than or equal to that grade. To calculate this value for any given grade, we add up the percentage of reviews for that grade and each grade above it. As we move down the grades from ‘A’ to ‘F-‘, the percentage increases, finally reaching 100% of all reviews being greater than or equal to an ‘F-‘. This is a nice tool to use when we know that an ‘A-‘ is worth more than a ‘B+’, but we don’t want to argue about the difference in value between the two grades.

Above is a sample data set and cumulative distribution function for an imaginary period in GR history. The green arrows show how to read the graph: for this period, a ‘C’ grade or higher was given to 60% of reviews. We can see from the data set that the difference between two adjacent points on the cumulative distribution function is exactly equal to the percentage of reviews receiving the lower grade. This means that we can judge from the graph what percentage of reviews had a certain grade by looking at the slope between that grade and the previous (higher) one.

Got all that? Great. Now forget everything and just remember this: for two different time periods graphed together, if one line is higher than the other across all grades (particularly the ‘A’ to ‘B-‘ period), that line represents the period with more lenient grading.

First up: Self-ownership Game Revolution vs. Bolt Media. We can see that one line is clearly above the other across all grades. And that period of lavish grading excess is…

The self-ownership period. Son of a *****. According to Game Revolution’s own review data, grading actually became more stringent during the Bolt Media ownership period. But then again, those Bolt Media guys went bankrupt in 2007. They wouldn’t know a game review website from a giant pile of anti-money, and those lower review scores could easily have come from equally low reviewer morale under such incompetent managerial overlords.

My issue lies with the current Game Revolution review team and their owners, CraveOnline. And if we compare the three years and change under Crave’s ownership to the independent period, we’ll find—

Holy ****.

Yes, those are two individual cumulative distribution functions. Both periods’ grade distributions are just so closely matching that the lines actually overlap each other. If I had to save a man from hanging by proving that the percentage of reviewed games receiving a ‘B’ or better from Game Revolution was constant over the periods of self-ownership and CraveOnline ownership, this is the chart that I would present to the jury.

So whether self- or corporate owned, with an old crop of veteran reviewers or freshly conscripted foot soldiers, Game Revolution has been scrutinizing games with the same honest, unflinching criticism we’ve all come to know and love. The good are praised, the bad are razed, and all advertising kickbacks be damned straight to Hell.

Don’t I feel like an *******.

BONUS: For those who want to see a more detailed comparison view of the actual percentage breakdowns for each grade, have one and the other.